Your Credit Score - What It Is and Why It Matters

You’ve probably heard the phrase “credit score,” but you might not know what it is or why it’s important. Here’s a quick overview.

What is a credit score? This is a number that helps lenders predict how likely it is you’ll pay back the money they lend you—whether it’s a “loan-loan” (like a loan you take out to buy a car or pay for school) or a credit card.

How’s it calculated? Most credit bureaus rely an algorithm developed by Fair Isaac Corp.—better known as FICO. It uses information from your credit report like your current credit card limits and/or loan amounts, when you opened your credit accounts, account balances and payment history. Things that hurt your score include making late payments, having an account that’s sent to a debt collector, not making payments on a loan (also known as defaulting) or maxing out your credit cards.

Why should you care about your credit score? Lenders use your score to decide if they’re willing to loan you money and what interest rate they’ll charge you. If you’re considered very risky, you might not be able to get a loan or credit card; if you’re considered at least somewhat risky, you might have to pay a higher interest rate, which could mean bigger payments and less money in your pocket.

What’s a good credit score—and a bad one? FICO scores usually range from 300 to 850. Here’s how our friends at FICO describe the risk associated with various scores:

Score

Risk Rating

800+

Exceptional

740-799

Very Good

670-739

Good

580-669

Fair (below average)

579 and lower

Poor

How does your credit score affect your student loans? If you’re trying to borrow money for college, most federal student loans will not look at your credit—in fact Federal Direct PLUS loans don’t require you to share things like a bankruptcy—but private loans usually will. If you or your parents are applying for a loan like those offered by your credit union and Credit Union Student Choice, your credit score will help determine whether you’re approved and the interest rate you’ll pay.

How can you find out what your credit score is? There are three services that calculate and report your score: Experian, Equifax and TransUnion. Although you’ll find plenty of ads promising a free credit report, watch out: many services charge a fee and some might sign you up for an ongoing plan (ka-ching!). A good place to go for free reports and information is AnnualCreditReport.com.